July 4 (Bloomberg) -- JPMorgan Chase & Co. unwittingly
helped BNP Paribas SA violate U.S. sanctions as the French bank
hid billions of dollars in transactions involving Sudan and
Cuba, according to court documents and people with knowledge of
the matter.

BNP Paribas turned to JPMorgan on the basis of legal advice
from Cleary Gottlieb Steen & Hamilton LLP, said two people who
asked not be named because the identities of the bank and the
law firm haven’t been disclosed. The Paris-based lender relied
on a legal memo that suggested using a U.S. bank might protect
it from sanctions penalties, according to the statement of facts
filed by prosecutors in New York.

JPMorgan is referred to as “U.S. Bank 1” while Cleary
Gottlieb is identified as “U.S. Law Firm 1” in the court
filings, the people said. Cleary Gottlieb later said such
transactions may be illegal. Neither JPMorgan nor Cleary
Gottlieb are accused of wrongdoing.

BNP Paribas, France’s largest bank, agreed June 30 to plead
guilty to processing almost $9 billion in banned transactions
involving Sudan, Iran and Cuba from 2004 to 2012. The company,
which will pay a record $8.97 billion in penalties, will also be
temporarily barred from handling some U.S. dollar transactions.

BNP Paribas shares fell 1.7 percent to 50.39 euros at 1:27
p.m. in Paris. They’ve gained 1.7 percent since the close of
trading on June 30, the day the settlement was announced.

Satellite Banks

In 2011, JPMorgan paid $88.3 million to settle an unrelated
civil probe into transactions involving Cuba, Iran and Sudan.
Investigators at the Treasury Department cited incidents in
which JPMorgan managers and supervisors “recklessly failed to
exercise a minimal degree of caution or care” in their
sanctions obligations. The bank said at the time that none of
the alleged violations was intentional.

BNP Paribas used a network of non-U.S. banks, including at
least nine Arab banks, to disguise U.S. dollar transactions,
according to court papers. “To the U.S. bank, it appeared that
the transaction was coming from the satellite bank rather than a
Sudanese bank,” according to the statement of facts filed in
court, which BNP Paribas admitted to as part of its settlement.

BNP Paribas would transfer funds from a Sudanese bank to an
account maintained by one of the satellite banks, according to
the filing. The satellite bank would then transfer the money to
the beneficiary by submitting the funds through JPMorgan without
any mention of Sudan, according to the statement of facts, which
identified the bank only as “U.S. Bank 1.”

U.S. Bank

Joe Evangelisti, a spokesman for JPMorgan, and Cesaltine
Gregorio, a BNP Paribas spokeswoman, declined to comment on the
transactions. Sonja Steptoe, a spokeswoman for Cleary Gottlieb,
and Peter Carr, a Justice Department spokesman, also declined to
comment.

The plan to use JPMorgan was put together by BNP Paribas
executives in Paris and Geneva in the fall of 2004 after
transactions involving overseas clients caught the attention of
U.S. and state regulators, according to the statement of facts.
BNP Paribas signed documents with the regulators in September of
that year promising to improve its compliance systems.

Shortly thereafter, senior BNP Paribas executives met in
Geneva to discuss how “embargoes against sensitive countries,”
specifically Sudan, Libya and Syria, would affect the bank’s
business, according to the statement of facts. They discussed
using an unaffiliated U.S. bank to process payments involving
countries subject to U.S. sanctions, the document states. Until
then such transactions were being handled by BNP Paribas’s New
York branch.

‘Vast Majority’

Following that meeting, BNP Paribas employees in Geneva
were instructed to have U.S. dollar payments involving
sanctioned entities cleared through “U.S. Bank 1” instead of
BNP Paribas’s New York unit.

“From 2004 through 2007, the vast majority of BNPP
Geneva’s transactions involving Sudanese Sanctioned Entities
were cleared through U.S. Bank 1 using a payment method that
concealed from U.S. Bank 1 the involvement of Sanctioned
Entities in the transactions,” according to the document.

In switching to JPMorgan, BNP Paribas executives relied on
the legal opinion, which incorrectly suggested that U.S.
authorities might not be able to punish BNP Paribas for
prohibited transactions if no U.S. branch of the bank was
involved, according to the statement of facts.

‘Compliance 101’

“You can’t do something indirectly if you can’t do it
directly,” Douglas Jacobson, a lawyer specialized in
international trade with Jacobson Burton PLLC in Washington,
said in an interview. “This certainly on its face here is not
consistent with what I would call sanctions compliance 101.”

In 2006, BNP Paribas enlisted a second law firm, Clifford
Chance LLP, which warned the bank that removing identifying
information from dollar payments sent to the U.S. in order to
avoid economic sanctions was possibly illegal, according to the
filing. Matt Hyams, a Clifford Chance spokesman, declined to
comment.

That same year, Cleary Gottlieb informed BNP Paribas in two
other opinions that U.S. sanctions could apply even if
transactions were processed through JPMorgan rather than BNP
Paribas’s New York branch.

The firm also said that U.S. authorities had become
sensitive to the use of “cover payments” by foreign banks that
omitted details about the nature of transactions. Cleary
Gottlieb advised BNP Paribas executives to “ensure that they
have adequate procedures in place to guard against any abuses of
cover payment messages that could cause U.S. operations to
engage in prohibited transactions.”

Cuban Transactions

From July 2006 until BNP Paribas ended its banking
relationship with Sudanese clients in June 2007, BNP Paribas
processed $6.4 billion in illicit dollar transactions, according
to the statement of facts.

A similar process was used by the firm to process Cuban
transactions and bank employees were trained to remove any
mention of the country before submitting them to JPMorgan. From
October 2004 until early 2010, BNP Paribas processed more than
$1.7 billion in Cuban-related illicit transactions.

Some of those transactions were processed through JPMorgan,
according to the statement of facts.

In February 2006, JPMorgan rejected a transaction submitted
on behalf of a Cuban credit facility after “back office
employees had inadvertently made reference to Cuban entities,”
the document states. Two other payments were also blocked by BNP
Paribas’s New York branch. BNP Paribas resubmitted all three
transactions after eliminating the references to the Cuban
entity, according to the document.

‘Cavalier Approach’

“BNPP’s handling of these blocked payments was indicative
of the bank’s cavalier -- and criminal -- approach to compliance
with U.S. sanctions laws and regulations,” according to the
statement of facts.

After the payments were blocked, a senior BNP Paribas
attorney in Paris, wondering whether a U.S. investigation could
be triggered, asked Cleary Gottlieb for advice. Cleary Gottlieb
answered in a March 6, 2006, memo, saying the transactions
violated U.S. sanctions -- regardless of whether they were
processed by JPMorgan or BNP Paribas’s New York facility. Cleary
Gottlieb advised BNP Paribas to “consider discontinuing
participation in any such U.S. dollar facility,” the statements
of facts said.

A subordinate of the senior BNP Paribas attorney forwarded
the Cleary Gottlieb memo to a bank compliance officer, drawing a
reprimand from his boss who said “we now no longer have
control,” according to the document.

The senior attorney then wrote to Cleary Gottlieb: “please
suspend any further work on this file.”